The Ground Reality regarding Purchases being made by SEZ Units

The position of SEZ Units is quite clear as per the IGST Act Section 16 (1) of which states very emphatically that the supplies made to SEZ’s are zero rated. Moreover Section 16(2) of the IGST Act states that except for the inputs as specified in sub-section (5) of Section 17 of the CGST Act, input tax credit can be availed for all these zero-rated supplies made to the SEZ virtually signifying that all these taxes paid would be eventually refunded in parity with the maxim that “Taxes should not be Exported”

Further Section 16 (3) goes to state that the supplier to the SEZ(Registered Person making supplies to the SEZ) has two options which are as follows:

1. Submit a Letter of Undertaking (LUT) or a Bond and supply at zero rate to the SEZ and claim input tax paid on input for such supplies made to the SEZ   OR
2. Alternatively pay IGST on the goods or services supplied and claim the refund of such tax paid

It needs to be emphasised that it is only the Registered Supplier to the SEZ who can claim this refund and such a refund cannot be claimed by the SEZ unit itself as there is no enabling provision which gives authority to the SEZ Unit to claim such refund

Both the above provisions are workable on certain conditions being met wherein the words “subject to such conditions, safeguards and procedure as may be prescribed” has been used which indicate that the Rules and subsequent notifications need to be looked at.

Notification no 16/2017 which has been issued in this respect has clarified as follows:

In exercise of the powers conferred by sub-rule (5) of rule 96A of the Central Goods and Services Tax Rules, 2017, the Central Board of Excise and Customs hereby specifies the conditions and safeguards for the registered person who intends to supply goods or services for export without payment of integrated tax, for furnishing a Letter of Undertaking in place of a Bond.

i. The following registered person shall be eligible for submission of Letter of Undertaking in place of a bond: -

(a) a status holder as specified in 1[paragraphs 3.20 and 3.21] of the Foreign Trade Policy 2015-2020; or

(b) who has received the due foreign inward remittances amounting to a minimum of 10% of the export turnover, which should not be less than one crore rupees, in the preceding financial year,

and he has not been prosecuted for any offence under the Central Goods and Services Tax Act, 2017 (12 of 2017) or under any of the existing laws in case where the amount of tax evaded exceeds two hundred and fifty lakh rupees.

ii. The Letter of Undertaking shall be furnished in duplicate for a financial year in the annexure to FORM GST RFD – 11 referred to in sub-rule (1) of rule 96A of the Central Goods and Services Tax Rules, 2017 and it shall be executed by the working partner, the Managing Director or the Company Secretary or the proprietor or by a person duly authorised by such working partner or Board of Directors of such company or proprietor on the letter head of the registered person.

Further  Circular No 4/4/2017 dated 07/07/2017 has been issued which states that in case a registered person intending to supply goods to SEZ at zero rate decides to furnish an LUT’s then conditions given in Notification  no 16/2017 should be met or else he has to furnish a Bond  wherein a Bank guarantee for 15% needs to be furnished and if the Commissioner so decides he can waive the requirement of a Bank Guarantee

The fact of the matter is that no cognizance is being given to the things happening at the grass root level and how the exporters are actually dealing with the situation at hand. In fact at the ground level, what actually is going on is that none of the suppliers to SEZ units are willing to go through these cumbersome formalities (even if they qualify) and are telling the SEZ units to pay IGST at the full  rate on goods supplied by them. They are willing to take the GST Number of the SEZ unit and are also willing to do the required entries while filing their sales details but they are not prepared to supply at zero rate to the units.

The SEZ Units do not have any alternative but to pay the IGST charged by these suppliers to keep their production and exports going and only hope that the Government would be kind enough to refund these taxes paid by them till all this confusion settles.